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DISHA/2015
10/01/2015
DISHA/2015
10/01/2015
Implication
3
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Implication
4
10/01/2015
E0
Ke g
Ke g
Note:
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Implication
6
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DISHA/2015
10/01/2015
Where,
8
growth rate.
gn
indicate normal
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Implication
9
1.
2.
3.
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10/01/2015
Refer Note: A
Implication
11
No-growth firms
Expansion rather than growth faced by the firm.
DISHA/2015
10/01/2015
NOPLAT (1 g / ROIC )
WACC g
DISHA/2015
10/01/2015
Implication
13
EBIT
WACC
1
V
EBIT (1 T )
WACC
Analysts point
14
DISHA/2015
10/01/2015
Some Implication
15
1.
2.
3.
10/01/2015
The P/E ratio (P/E = (1-b)/ke-g) does not explicitly include an adjustment for any balance
sheet measure. Assume that a firm has an extraordinary liability. The liability might be for
such items as:
Damages (e.g. , faulty automobile tires, Pharmaceuticals that were harmful).
Unfunded contractual pension liabilities.
Unfunded contractual medical benefit liabilities.
The liabilities associated with buying another firm.
Assume the earnings of the latest year do not reflect any of these liabilities. A low P/E
might not represent an investment opportunity, but rather large expected liability
payments.
Refer note C
DISHA/2015
10/01/2015
Implication
17
P0 L (1 b) (1 g )
E0
Ke g
Analysts point
18
Implication
19
DISHA/2015
10/01/2015
AN EXCESS ASSET
Assume a firm can divert assets that it owns without
adversely affecting its future cash flow stream. The most
easily identified asset of this nature is excess cash (cash
that is not an essential component of working capital). If
the analyst computes the value of the firm using a cash flow
model, it is now necessary to add the value of the excess
cash to the present value of the cash flows (if it is not
already included).
In like manner, if the P/E calculation does not reflect this
extra asset, it should be adjusted. The excess asset
adjustment is analogous to the adjustment for an
extraordinary liability, but the effect is exactly opposite.
DISHA/2015
10/01/2015
10/01/2015
D1
SD
P
Ke g
P SD
(1 b)
E
Ke g
SD = Special Distribution on account of excess
asset (Cash Balances)
DISHA/2015
10/01/2015
An Example
23
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Implication
24
10/01/2015
Analysts point
25
DISHA/2015
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26
DISHA/2015
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DISHA/2015
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P/C
0
17.3
0
17.2
9.8
25.8
12
5.5
9.1
24.9
16.7
18.1
P/E
18.50
0
20.4
0
19
11.1
27
14.9
6.7
10.3
26.7
21.8
21.1
P/BV
0
6.03
0
4.82
2.48
3.98
2.07
1.12
3.51
10.93
3.16
3.85
The PEG ratio is the ratio of price earnings to expected growth in earnings
per share.
PEG = PE / Expected Growth Rate in Earnings
Definitional tests:
Is the growth rate used to compute the PEG ratio
on the same base? (base year EPS)
over the same period?(2 years, 5 years)
from the same source? (analyst projections, consensus estimates..)
Is the earnings used to compute the PE ratio consistent with the growth
rate estimate?
No double counting: If the estimate of growth in earnings per share is
from the current year, it would be a mistake to use forward EPS in
computing PE.
DISHA/2015
10/01/2015
29
DISHA/2015
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Interpretation
30
DISHA/2015
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Empirical evidence
31
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Implication
32
DISHA/2015
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33
DISHA/2015
10/01/2015
1. High risk companies will trade at much lower PEG ratios than low risk
companies with the same expected growth rate.
The company that looks most under valued on a PEG ratio
basis in a sector may be the riskiest firm in the sector
DISHA/2015
10/01/2015
A.
Consistency Tests:
A.
If the market value of equity refers to the market value of
equity of common stock outstanding, the book value of
common equity should be used in the denominator.
B.
If there is more that one class of common stock outstanding,
the market values of all classes (even the non-traded
classes) needs to be factored in.
DISHA/2015
10/01/2015
BV0 ROE (1 b) (1 g )
D1
Ke g
Ke g
P0
ROE (1 b) (1 g )
BV0
Ke g
If the return on equity is based upon expected earnings
in the next time period, this can be simplified to,
P0
ROE (1 b)
BV0
Ke g
DISHA/2015
10/01/2015
An Implication
38
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DISHA/2015
39
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(
P
/
B
)
B
B K gB K gB
Refer Note: E
DISHA/2015
10/01/2015
P
P
E
B
E
B
P
P
ROE
B
E
10/01/2015
Implication
42
High P/B
Declining companies
Low P/E
Expected positive RI
Decreasing income
Low P/B
Improving companies
Expected negative RI
Increasing income
10/01/2015
Empirical evidence
43
DISHA/2015
Refer:
10/01/2015
Research paper
Analyst point
44
1.
2.
3.